Global capitalism -- one dollar, one vote -- is like government by a school of piranha that furiously tear chunks out of anything that bleeds. Global Intelligence Update Red Alert September 24, 1998 Mahatir Demonstrates an Alternative Asian Solution The focus of the Asian crisis is shifting to Malaysia, where the political consequences of economic meltdown are now being played out The overt crisis revolves around the decision of Prime Minister Mahatir Mohamad to fire and then arrest his Deputy Prime Minister, who also served as his Finance Minister and heir apparent. The deeper issue, transcending both personality and politics, concerns how Malaysia will respond to its own version of the general Asian crisis. Mahathir, who has long been an advocate of Asian solidarity, has charted a course that is both idiosyncratic and, in our mind, a model of the direction Asia is going to be moving in the coming months. Thus, the political crisis points in an interesting and revealing direction. The split between Mahathir and Deputy Prime Minister Anwar Ibrahim began over differences of opinion as to the best way to achieve economic stability in Malaysia. Anwar favored a Western- style financial reform package, similar to the IMF packages being put in place all over Asia. Mahathir, however, was more in favor of a national approach to solving the problems, one which relied more on Kuala Lumpur than on multilateral agencies. Mahathir, who had carefully observed events in neighboring Indonesia, including the fall of Suharto in May, became increasingly convinced that the IMF solution to the Indonesian problem was not only ineffective, but that it had directly led to the fall of the Suharto government and the resulting disorder in Indonesia. Since he was convinced that the IMF did not have any workable solutions in hand, he was not prepared to risk his regime by following IMF dictates. After Suharto's fall, Mahathir became concerned about the support his erstwhile protege, Anwar, had been developing in the ruling party, the United Malays National Organization (UMNO). Anwar and one of his deputies made remarks in June suggesting that the Malaysian situation was analogous to that of Indonesia, with the clear implication that Mahathir's fate ought to be the same as Suharto's. Needless to say, Mahathir vigorously disagreed with this analysis. With the UMNO becoming divided over the ability of Mahathir to lead Malaysia out of its economic turmoil, Mahathir needed to act swiftly. In July he brought in his friend Daim Zainuddin as Special Functions Minister, removing much of the control Anwar had over Malaysia's financial decisions. A campaign of vilification against Anwar was launched, including the interesting charge by his brother in law that he had been sodomized by Anwar. Apart from personality and power, the struggle between Mahathir and Anwar represents a struggle between two visions of how Malaysia and Asia are to recover from their shared economic crisis. Anwar and his allies represent the conventional view on how to solve Malaysia's crisis. Their focus is on external aid, particularly from multilateral organizations like the IMF. Since the price for IMF support is austerity at home, the imposition of market reforms and a decrease in protection, this faction is prepared to make fundamental changes in Malaysia's economy. Of course, since economic liberalization runs counter to Mahathir's more authoritarian, less liberal economic strategy, it followed that Mahathir had to go. Mahathir's own analysis was fundamentally different. In his view, the IMF offered no solution at all. The amount of money and credit being offered was completely insufficient to solve Malaysia's problems. Moreover, the IMF's price would create social chaos in Malaysia. For example, the IMF required a rigorous program of closing insolvent banks, writing off bad loans and decreasing available credit accordingly. Having seen the consequences of these policies in Indonesia, Mahathir's position was that, since the IMF provided no real solution anyway, it followed that it made no sense to pay the price. Mahathir has pursued a radically different course. On September 1, Mahathir announced new foreign exchange controls, effectively limiting the convertibility of the Ringgit. In addition, earlier this week, Mahathir's government introduced new banking regulations that provided banks with more time in which to write off bad loans, reduced reserve requirements, and generally allowed Malaysian banks, at least internally, more room for maneuver. In addition, Mahathir had Anwar arrested in the midst of the Commonwealth Games and Queen Elizabeth's visit. What is important about events in Malaysia is that they demonstrate a new economic response to the crisis emerging. The previous response has been to look to the outside for support. Malaysia's response to is cast itself free from the outside, on the theory that the outside world not only doesn't hold open a solution but that the solutions it offers will be more harmful. Since Malaysian exports have declined precipitously, the inflow of investment into Malaysia has collapsed altogether, and outside aid is completely insufficient to solve any problems, Mahathir has clearly decided that economic nationalism no longer bears much of a cost. Naturally his neighbors are appalled, and none more so than Singapore. Singapore, one of the healthiest economies in the region, is intimately tied to a liberal trade regime, given its role as financial center and exporter. Prime Minister Goh Chok Tong warned yesterday that Malaysia's model, if followed by the rest of Asia, could trigger U.S. protectionism and a collapse of interregional trade. Mahathir's position, of course, is that with or without formal protectionism, Malaysia's economy has already been smashed, and there is little hope in looking for salvation in trade with the United States. Punctuating this exchange on economic theory, Malaysia banned overflights by Singapore aircraft, disputes over minor border issues have begun to flare again, and Malaysia has threatened to ban exports by Malaysian companies through the port of Singapore. Thus, Malaysia's internal political argument has important international ramifications. One of the most interesting was the decision by Japan to loan Mahathir's government about $1 billion after Anwar's arrest and the announcement of a nationalist economic policy. So while Australia condemns Mahathir's suppression of Anwar and Singapore warns of dire consequences, the Japanese are lending him money. Interesting. Nothing is decided in Malaysia. The Central Bank moves back and forth on regulations and the situation is fluid. Our sense, however, is that Mahathir will carry the day both because of his entrenched power and because his economic policies promise, albeit only in the short run, some relief from economic pressure. The debate between Singapore and Malaysia sets the stage between the two great camps forming up in Asia: Asianists and Internationalists, those looking to the West for answers and those arguing that answers are national and regional. This debate, of course, takes place on the Straits of Malacca, one of the most strategic waterways of the world. Should the debate adjourn from the theoretical and political, it would have extraordinarily important consequences for nations outside the region. We are far from that point, of course. But then, just two years ago today's events would have been unthinkable. ___________________________________________________ To receive free daily Global Intelligence Updates or Computer Security Alerts, sign up on the web at http://www.stratfor.com/mail/, or send your name, organization, position, mailing address, phone number, and e-mail address to [EMAIL PROTECTED] ___________________________________________________ STRATFOR Systems, Inc. 504 Lavaca, Suite 1100 Austin, TX 78701 Phone: 512-583-5000 Fax: 512-583-5025 Internet: http://www.stratfor.com/ Email: [EMAIL PROTECTED]
